Accounting: The Language of Business - Vol. 2 (Intermediate: Part 156)

Whoever is greedy troubles his household (Proverbs 15:27)

Short-Term Operating Assets: Inventory (Part B)

by

Charles Lamson

Inventory Systems

Companies use either a periodic or perpetual inventory system.

Periodic Inventory System. Under a periodic system, a company determines the inventory balance and the cost of goods sold at the end of the accounting period. Each time a sale is made, a company does not reduce inventory and increase cost of goods sold. Rather, a company determines them periodically.

The balance sheet includes the opening balance of inventory. Purchases made during the period increase inventory available for sale. Firms net any purchase returns, allowances, and discourses with purchases made. Firms record purchases in a separate purchases account, a temporary account used to accumulate inventory acquisitions during a period that is closed out at the end of the period. The beginning inventory balance plus the net purchases is the cost of goods available for sale—that is, the total amount of inventory that will either be sold during the period or remain in ending inventory. 

The ending inventory balance is based on a physical count of the inventory made by going to manufacturing and storage facilities and actually counting the inventory located at these sites. Firms determine the cost of goods sold at the end of the period using the computation illustrated in Exhibit 10.3.

EXHIBIT 10.3 Computation of Cost of Goods Sold: Periodic Inventory System

 Example 10.1 illustrates accounting under the periodic inventory system.

*GORDON, RAEDY, SANNELLA, 2019, INTERMEDIATE ACCOUNTING, 2ND ED., PP. 509-510*

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